Market Commentary 1st September 2020 from Charlie Hancock

Posted by melaniebond
Market Commentary 1st September 2020
Equity Indices
The FTSE 100 slid by 0.64% last week, hampered by the Pound strengthening against other major currencies. The FTSE 250 index gained 1.20% across the week.

Investor sentiment was positive for most of the week. Encouraging US-China trade discussions and expectations of continued loose monetary policy appeared to outweigh concerns about rising coronavirus cases in Europe. News that AstraZeneca have started an initial trial for an antibody based Covid-19 treatment also lifted investor spirits.

Last week saw some gloomy headlines regarding the retail sector, after data from the Confederation of British Industry (CBI) showed that retailers are cutting jobs at the fastest pace since the financial crisis. The survey carried out by the CBI indicated that major retailers are planning to make further cuts during the 3rd quarter.

Equity markets in Europe were in positive territory last week, resulting in the broad FTSE All World Index – Europe ex UK rising by 2.09%. Germany’s DAX index gained 2.10%.

The results of an economic sentiment survey carried out by the European Commission were released last week, with the data showing a mixed picture. Sentiment for the Eurozone as a whole rose during August, with France and Germany seeing significant improvements, however, the survey showed that sentiment in Spain has deteriorated. The survey indicated that a sharp rise in coronavirus cases is taking its toll on the Spanish economy, even in the absence of a national lockdown.

Data for the German economy showed that it contracted by less than previously thought during the 2nd quarter, with a 9.7% drop in output compared to the previous estimate of 10.1%.

Equity indices in the US climbed last week, with the S&P 500 seeing a 3.26% gain and the Dow Jones Industrial Average rising by 2.59%. The S&P 500 is now 3.6% higher than the pre coronavirus record set in February 2020, whilst the Dow Jones Industrial Average Index is 3.04% lower than its all time high seen earlier this year.

Comments from the US administration and officials in Beijing helped to boost market sentiment in the early part of last week, with both sides indicating they are committed to building on the phase 1 trade agreement reached earlier this year.

Comments from the head of the Federal Reserve, Jerome Powell, helped to push equity indices higher during the latter part of the week. Powell explained that following a review of the central bank’s monetary policy framework, it would now allow inflation to rise above their 2% target, in order to offset periods of lower inflation. The policy change is likely to mean that interest rates remain close to zero for a prolonged period of time.

Asian equity indices were generally positive last week and the broad FTSE All World Index – Asia Pacific gained 2.01% as a result. China’s Shanghai Composite Index rose by 0.68% and Japan’s Nikkei 225 declined by 0.16%.

The Nikkei 225 index was on course for a reasonable gain, before declining sharply on Friday after it was confirmed that Prime Minister Shinzo Abe had resigned. Abe delivered a speech in Tokyo on Friday, citing health issues as the reason for his resignation. The reaction from investors appeared to be driven largely by the surprise nature of the announcement, with analysts expecting that the policy approach seen under Abe’s tenure will be maintained by a replacement PM.

Bond Yields
UK government bond yields rose across the week as investors rotated away from government debt and into equities. The 10-Year Gilt yield moved from 0.21% to 0.31%.

The head of the Bank of England, Andrew Bailey, delivered a speech on Friday where he explained that the central bank is not out of firepower. Mr Bailey also stated that the bank will not prematurely raise interest rates as the economy recovers, which strengthened expectations of interest rates remaining at historic lows throughout the remainder of this year and 2021.

With investors happy to ditch government debt in favour of riskier assets, the 10-Year German bund yield reversed the decline seen during the previous week to reach -0.41%.
US treasury yields also climbed higher last week, with the 10-Year yield moving from 0.64% to 0.74%.

Whilst the Federal Reserve confirmed last week that they will allow inflation to overshoot their 2% target, it is expected that the headline rate of inflation in the US will remain below this target for some time. As a result, markets are not pricing in any interest rate rises from the Federal Reserve until the 2nd half of 2022.

GBP / USD – Current 1.3353 Previous 1.3090

GBP / EUR – Current 1.1215 Previous 1.1098

The Pound strengthened by 2.01% against the US Dollar and 1.05% against the Euro last week. The US Dollar continued its recent trend of weakening against most currencies, whilst headlines regarding a rise in European coronavirus cases appeared to dent confidence in the Eurozone’s currency.

The spot price for Gold rose by 1.25% to reach $1,965 last week.

With the precious metal typically viewed as a hedge against inflation, it attracted support following Jerome Powell’s speech at the virtual central bank conference. Weakness in the US Dollar also supported Gold last week.

Oil prices rose last week as traders priced in the possibility of a reduction in the oil supply. The expectations were driven by hurricanes forcing production plants located on the Gulf coast in the US to close. The Brent crude spot price climbed by 1.57% to reach $45.05 per barrel.